Financial literacy refers to the skills and knowledge required to effectively manage your finances. It entails understanding concepts like saving, investing, budgeting basics, credit, and debt. Financial literacy ultimately helps lead to an improved sense of financial well-being.
In this guide, we’re going over what is financial literacy as well as reasons why financial literacy is important. Plus, we’re sharing financial tips on budgeting basics and other resources for effective money management.
Why is financial literacy important?
There are multiple reasons why financial literacy is important. For starters, financial literacy helps you effectively manage your money–which gives you an upper hand when emergencies happen. Life is full of ups and downs. Taking care of your money means you’re in a better place to pull through tough situations and come out on top!
Financial literacy is also about learning the basics of budgeting to improve your savings and financial safety net, ultimately leading to greater financial security and freedom.
RoarMoney is our all-in-one $1/month bank account with integrated budgeting tools. Check out all the RoarMoney features and perks here.
6 important financial literacy terms
To improve your financial literacy, it helps to start with the basics. Let’s go over some key financial literacy terms you should know.
1. Compound interest
Compound interest refers to earning interest on top of interest. Say you invest $1,000 and it grows by 5%, or $50, to a total of $1,050 by the end of the year. Now when you earn interest, you’ll be doing so on a larger amount of money. Compound interest is a powerful force that can expedite portfolio gains over time.
2. Good debt
Good debt is money borrowed to finance a profitable venture or asset. It comes down to the type of return you can expect to earn on the investment. For example, borrowing money to purchase clothes or a car, items that tend to depreciate in value, is not good debt because you typically won’t make a return. However, buying a house that appreciates in value over time is considered good debt.
3. Credit-utilization ratio
Your credit-utilization ratio is one of the most important factors affecting your credit score. This ratio displays the total amount of debt you owe compared to your total available credit–also known credit utilization ratio. It’s calculated by dividing your total debt by your available credit. To keep your credit score in top shape, you never want your credit utilization ratio to be above 30%.
4. Pay yourself first
Paying yourself first means prioritizing your investment goals ahead of your wants, everyday spending habits, and even bills. This strategy entails organizing your budget in a way that ensures your setting aside savings from every paycheck–even if it means cutting back on other expenses.
Diversification is an investment strategy that ensures all your eggs aren’t in a single basket. In short, this means investing in different types of industries, companies, and assets to ensure balance.
Diversification can help protect against market downturns and even reduce risk. A great way to diversify your investment portfolio is by investing in exchange-traded funds (ETFs) instead of individual stocks. MoneyLion offers fully-managed investment portfolios built on this strategy.
Liquidity refers to how easily your assets translate into cash. In case of an emergency, it helps to know your money is quickly accessible. A safety net savings account or investment account are two sound ways to store cash so that it’s readily available.
Learn more about how MoneyLion’s new safety net feature can help you when you need it most!
How can I improve my financial literacy?
When it comes to financial literacy – there’s always room for improvement. It doesn’t matter how experienced or well-read you are, there are ways to get better at managing money. Here are some quick steps to help you improve your financial literacy.
Follow a budget
Budgeting is one of the most important ways you can get your finances on track to meet your goals. Start by defining your financing goals and tracking your spending. MoneyLion’s RoarMoney bank account features automated spending tracking tools that help you visualize where your funds are going.
Ideally, you want to find ways to cut back on unnecessary expenses and dedicate more towards your investment accounts. From there, it’s about allocating your monthly income towards categories like essential spending, non-essential spending, savings, and more.
Read financial books
Remember when we said there’s always room to improve your financial literacy? One of the best ways to do this and stay updated on the latest economic trends is by regularly reading financial books.
At MoneyLion, some of our favorite finance books include:
- Why Didn’t They Teach Me This in School?: 99 Personal Money Management Principles to Live By – by Cary Siegel
- The Total Money Makeover: A Proven Plan for Financial Fitness – by Dave Ramsey
- The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich – by David Bach
- Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence – by Vicki Robin
- Clever Girl Finance: Ditch Debt, Save Money and Build Real Wealth – by Bola Sokunbi
Understanding interest rates
Interest rates can either work for you or against you. Understanding the difference between the two is key to financial literacy. Interest rates can be the amount lenders charge you to borrow money. This is oftentimes calculated on an annual basis and denoted as the annual percentage rate (APR).
Interest can also be the amount you earn from a bank or credit union through a savings account deposit. This type of interest is denoted as annual percentage yield (APY).
When borrowing money, you want to look out for offers with low APRs. Even better, MoneyLion offers 0% APR cash advances with no hard credit check.
Listen to financial podcasts
Staying up to date on the latest financial tips and news will help improve your financial literacy. Some notable financial podcasts include:
- Your Money Briefing
- 15 Minute Financial Advisor
- How to Money
- You Need a Budget
- Money Life With Chuck Jaffe
Talk to family and friends
As you progress in your financial literacy journey, make sure to include your family and friends along the way. It helps to speak openly with others about your financial journey and share insights. Even better if you can find yourself a buddy to discuss financial strategies and keep you accountable on your budget.
Use MoneyLion’s resources for financial literacy
Building financial literacy takes time and is an ongoing process. Nevertheless, it’s one of the most important things you can do to ensure financial security and freedom. Make sure to use MoneyLion’s tools along your journey. From safety net accounts to fully-managed portfolios and even credit-building tools, MoneyLion is your partner when it comes to building your financial future.
What are the 3 main components of financial literacy?
Saving, investing, and budgeting – use MoneyLion’s RoarMoney for tracking tools and in-app budgeting.